When a bankruptcy case is filed with a court, a bankruptcy estate, which includes all of a debtor’s legal and equitable interests, is formed. Typically, the estate is subject to the bankruptcy court’s jurisdiction, and it is reviewed by a court-appointed bankruptcy trustee. The trustee generally represents the creditors’ interests in the suit. During the bankruptcy proceedings, the estate becomes the legal owner of the debtor’s tangible and intangible assets. Assets held in a bankruptcy estate are frequently sold by the trustee in order to pay off the debtor’s outstanding obligations.
Under bankruptcy estate law in many jurisdictions, a bankruptcy estate includes not only the debtor’s interests but also any community property belonging to the debtor and his or her spouse. The estate typically contains all of the debtor’s tangible assets. For example, the estate may include a piece of land owned by the debtor, a car, or a collection of artwork. Usually, a debtor cannot sell or transfer property that is part of the bankruptcy estate without the court's permission.
As a general rule, bankruptcy estates can also include intangible rights. For instance, the estate may contain stock options, intellectual property, business goodwill, or the right to file a lawsuit. An estate can also incorporate the debtor’s right to receive inheritances once the bankruptcy suit has been filed. Certain tax rights may also become part of the estate. For example, an estate may include tax attributes or tax refunds for pre-petition years.
Usually, when starting a bankruptcy case, a debtor must disclose all of the estate’s assets in a bankruptcy schedule. Any assets that are not exempt are usually sold by the bankruptcy trustee. The proceeds are used to pay administrative fees relating to the bankruptcy proceeding as well as to pay off creditors.
Some assets may be exempt or removed from the bankruptcy estate. For instance, in some jurisdictions, a debtor can exclude rights in spendthrift trusts, 401(k) plans, and certain qualified retirement plans from the estate. Generally, bankruptcy statutes dictate what type of assets may be excluded from the estate. Statutory exclusions can vary from jurisdiction to jurisdiction.
Typically, a debtor is not required to list exempt assets as part of the bankruptcy estate. Essentially, this means that exempted assets cannot be reached by creditors or by the bankruptcy trustee. The debtor may retain exempted property and use it to start over after the bankruptcy proceedings are finalized.
